Thursday, Oct 17, 2019

By Rituparna Ghosh

NEW DELHI – With economic slowdown deepening in India and the rest of the world, one commodity that has undoubtedly taken a hit this year is steel.

Steel prices in India have fallen sharply since the start of this year due to weak demand from the construction sector. Though a few traders and investors are betting on some upward correction in prices during the festival season, as infrastructure spending picks pace, industry experts believe the rise in prices may not sustain for long.

"If demand conditions remain subdued, I don't see prices rising meaningfully. There could be intermittent ups and downs, but over the next couple of quarters, I don't see any material improvement," ICRA Ltd Senior Vice-President and Group Head - Corporate Ratings Jayanta Roy said.

Prices would improve only if the pick-up in demand sustains, "but it is difficult to predict the extent of such improvement because at the same time you have international prices which remain subdued," Roy said.

Prices of steel, a key engineering and construction material, have been on a continued downtrend since last year as manufacturing and construction activity slowed down in India, and economic growth faltered.

Prices of steel rebar have fallen 15% since the start of this calendar year to 32,900 rupees per tn in the physical steel market in Mandi Gobindgarh, Punjab, the largest spot steel market in the country. Steel ingot prices also dropped by 20% to 28,500 rupees per tn, while steel scrap prices have fallen by about a quarter to 18,800 rupees a tn.

Steel rebar prices on the London Metal Exchange, too, have fallen 10% since Jan 1 to $403 per tn, while on the Indian Commodity Exchange, the steel long contract has dropped by over 15% so far this year to 28,240 rupees per tn.

The fall in domestic steel demand is evident from the data released by Joint Plant Committee. India's crude steel production was at 45.98 mln tn during Apr-Aug, while consumption was just 42.61 mln tn.

Exports also failed to offer any respite--India's steel exports fell 7% on year to 2.46 mln tn in Apr-Aug due to poor global demand, while imports rose marginally to 3.35 mln tn.

The slowdown in growth was evident across all the sectors where steel is consumed--infrastructure, automobile, construction and manufacturing.

According to market participants, poor demand for steel products from the construction sector led to higher inventories with the primary steel producers. These primary steel producers started offloading stocks directly in the retail market, which is generally dominated by the secondary steel makers. Prices tumbled as this resulted in an oversupply in the market, that too at a time when demand was poor.

Owing to a slowdown in operations, major integrated steel makers reduced their production as sales went down and further revised their prices to compete with the prices offered by the secondary steel makers in the retail market. This led to a sharp contraction in the spread between them.

An assessment of the physical market in Mumbai and Delhi made by CRU India showed that the price differential of rebar prices between large steelmakers and secondary steelmakers which generally hovers around 5.50-6.00 rupees a kg, dropped down to 3.50 rupees per kg this year.

"Secondary steel makers still were able to hold on to their prices but large steel makers had no option but to offer huge discounts because of their build-up stocks and that it was unviable for them to stop production," CRU India Senior Research Analyst Puneet Paliwal said.  

According to market participants, only an uptick in investment activity would lift steel prices on a sustainable basis, but as long as companies reel under liquidity concerns and the government's finances are stressed, steel prices are likely to remain under pressure.  

"India has its own steel consumption and demand but there are huge hardship in terms of liquidity and sentiment in the market. Once the sentiment improves and the government takes some steps to improve liquidity, things would be better. Otherwise, we are losing," JSW Steel Ltd Managing Director Vinod Nowal said.  

"Construction sector is improving, and with this, TMT prices are also picking up. But plate hot rolled steel is a problem as auto industry is not doing well. Though it looks like things would improve in the fourth quarter (Jan-Mar) as steel demand generally tends to pick up during this period," Nowal added.  

Moreover, the steel industry is also keeping a close eye on the governments' move on the Regional Comprehensive Economic Partnership. India is set to meet other members of the Association of Southeast Asian Nations and its six free trade partners--Australia, China, India, Japan, South Korea and New Zealand on Nov 4 to decide over the future prospects of enhancing market access and investment in these countries.

India's steel sector got exposed to low-cost imports from Japan and South Korea as several Indian companies kept sourcing better quality value-added steel to the domestic market. This was made possible due to an agreement signed earlier with members of ASEAN and its free trade partners. Opportunities to export to West Asia and Africa also suffered as China and Indonesia had already entered and saturated these markets.

Finished steel exports from India fell 27% on year to 1.01 mln tn in the quarter ended June. Steel imports of finished products were at 1.7 mln tn in the same period as against 1.9 mln tn last year. 

However, export of the finished steel in Apr-Aug picked up marginally and was up 0.6% to 2.7 mln tn, and imports were up 2.2% to 3.4 mln tn. 

The industry wants the government to put enough safeguards before signing the agreement.

Going ahead, traders expect steel prices to remain in a narrow range as prices of TMT are seen at 30,000-32,000 rupees per tn till December end.

The movement is likely to be similar in steel long contract on the ICEX.

India Nivesh Research Head Manoj Jain expects steel prices to settle at 29,000-29,500 rupees per tn till the end of December if infrastructure spending picks up during Diwali.

SMC Global Research Head Vandana Bharti expects ICEX steel long contract to trade in the range of 28,800-29,000 rupees till December.  End

US$1 = 71.23 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Boris Pradhan

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